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Hi, I’m Keith McCullough and welcome to our free webinar. Love doing the free stuff. I’m with Bryan McGough. We’re going to talk about the “Amazon-ing” of retail. Go big or go home. I love that. I love it. Bryan’s very good, by the way. The man, the myth, the legend: Bryan McGough. With our new board. I love it. So, let’s just go through it. In all seriousness, when people talk about the “Amazon-ing” of everything, what do you think?
So, I think overall, Amazon, the “Amazon-ing” of the world, it’s probably going to end up being the biggest buzzword of a generation. We had Just in Time, back in the 90s, we’ve got Omni-channel. That was something big for four or five years. We had something called BOPIS, you know what BOPIS is? Buy online and pick up in stores. I think Cole’s invented it, but it’s something that people don’t do and now we have something called the “Amazon-ism” of the world. My kids are in their 20s… this is when everyone pauses and says “wow I can’t believe McGough you got kids in their 20s…”
He’s older than he looks. By the way, most people may not know this, and I don’t know if they care, but the fact is that you taught me about retail. I was an analyst on the hedge fund side and Brian was the retail apparel analyst at Morgan Stanley. And he taught me about BOPIS.
So, look, when our kids are shopping, they’re going, “Dad, hey, I’m going to buy something online”. “All right, great, good Ryan, go”. “Hi dad, I’m going to the mall and buying something”. “Okay, hey go”. “No dad I’m going to buy something”. So now it’s just because Amazon is there, are we going to buy more sticks of butter? Are we going to buy more pair of sneakers? Are we going to buy fewer sweater shirts? Probably not. It’s just a function of where we buy them. Ultimately, I think Amazon, it’ll end up being the biggest roll up of the whole consumer space in our generation.
So, when you look at where the executives are on this, I think a lot of people that are watching this or obviously, and we’re going to get to it longs, shorts, winners, losers. Where do you think the CEOs of these companies are at in understanding this?
Look, I mean it’s easy to say, and Wall Street says “Oh, the CEOs are idiots”. I mean look, I’m telling you, I worked at Nike. At the top 500 executives… I guess if you’re 499, you’re not an executive, but your top 500 managers I put against Wall Street any day. I mean there’s brilliant people and they know what they’re doing. I don’t think that a lot of CEOs have a good strat plan. I think Nike does. I think RH does. I think a couple of other names do. So, it’s our job here to understand, or at least it’s my job, and our job overall, everybody out here, is to understand what the CEOs don’t know will be coming down the pike, all the crosscurrents out there. So, you have a lot of CEOs who are under invested in E-com. That’s a thing – “Oh we started investing in E-com 3 years ago”. “Good luck with that. You should have started 20 years ago”. So, what’s their process? Is their content relevant? Is the experiential element of what they do actually there and will they live or will they die? Do you have terminal value or not? If you have terminal value, is it in equity or is it in debt? and it’s not easy, but it’s simple.
That’s interesting. Now, you do boil it down to an easier, at least somebody would say you called a two-horse race, at this juncture. And it is between one that has also invested in their business, but Wall Street really up until this year hadn’t given him a lot of credit for that.
So, let’s say Walmart. We could elaborate on this. You have to two big beasts here: you have a t-rex and you’ve got somebody like King Kong. So, the point is this, Amazon has already admitted it needs an E-com business. scratch that, it needs stores. They bought Whole Foods. It’s got 400 stores in the top 300 MSAs, which is exactly where it’s got to be. It needs more stores. I could list off three, four names that it could and should and may buy. Let’s say Walmart. It needs a better E-com business. So, it’s got 4300 stores. it’s paying employees to actually drive groceries home to your house. So, I would ask, I will ask this is: it more difficult for Amazon to build the presence that Walmart has built over 50 years? Or is more difficult for Walmart to build what Amazon has built over 10? I’m not saying that Walmart will be Amazon. I’m just saying, this is a two-horse race. It might even be a three-horse race.
And on top of the fact that a lot of people don’t think about the logistics of retail. I mean Walmart’s not just built for 4300 stores as you know. The trucks and the warehouses… We actually have some interesting macro charts on that. But if you just kind of go backwards and show, or at least explain, what is jet.com first of all? For people like me, it’s starting to show up on my door and not every day, but certainly with more frequency than it had before. And it’s right there with anything from Amazon.
So jet.com, Amazon bought it 3 years ago. It’s almost like a mini Amazon, except it’s a little higher end. So, a product you can’t necessarily find at Walmart. If you want to buy a new driver, which you would buy online.
You mean a golf club?
Yeah, I’m saying a golf club. Now you’ll go and you’ll plug in “golf club”, which everyone is probably doing right now. And two of the top five choices will probably be from jet.com. it could be Dick’s Sporting Goods. So, Walmart is paying a lot out to Google in order to get that done, but Jet’s a platform. And the feedback I get is “Oh no, it’s so small, it doesn’t really matter”. Here’s the shtick: if you’re if you’re Walmart, you bought Jet, you bought Moose Jaw, you bought ModCloth, you bought all these little brands which gets you to a new consumer. So, it’s like, “okay, Brian still that’s a huge retailer, you can’t buy these little platforms and have it work”. I’ll give you an example. Back at Nike, and I think it was 2001, I bought a little company called Hurley, you have surf and skate shoes. It made 200 000 pairs of skate shoes at that point in time. So, you had Nike who said, “We’re going to learn this customer”. And that’s usually BS. It’s usually a way of doing a bad acquisition. Now, Nike makes 28 million pairs of skate shoes. It learned that customer.
And they learned how to send it to me; all my bathing suits are Hurley. And I’m not a skater.
I can’t fit in those anymore but… the key point is that Nike, actually, it has a strat plan. It has a lot of visionaries there. They did buy these small brands. They learned who the core customer is. I look at Walmart. And this sounds incredibly arrogant, but there are maybe 10 retailers where I think I know less than their strat planners do. Number one is Walmart. It’s probably Amazon.
I hope you do. And by the way I don’t think that that’s arrogant. I think and for those of you who aren’t used to listening to somebody who actually knows what they’re talking about because you’re probably listening to something else that’s been for free on the old wall for the better part of the morning, and I apologize for that because that’s no way to live. But if you actually listen to somebody who knows what they’re talking about, Brian should be as good, if not better, than any strat planner at any corporation because that’s his job. His job is actually to tell hedge fund managers, pension fund managers, mutual fund managers, what to get the hell out of their portfolio and what to get in by looking at the world holistically. That’s your job, so I don’t think you need to apologize for that. And by the way, it didn’t sound arrogant. I think that’s important. So, is the difference between jet, you said it’s a little higher end. I think a lot of people would say, “Well, I don’t know about that”. But what you’d say, unequivocally, you always write this, but Amazon going subprime, not just prime.
So, there’s a slide on this, on a new board. Alright, moving over here. So, this data, I think it’s great. Why? Because of something that we did and no one else has done. Anytime I put it in front of a PM, who manages a lot of money, always says, “Wow is that true?”
So, if you look at this chart, it shows the Amazon Prime, as in Amazon Prime, it shows acquisitions by year. So, if you subscribed to Amazon Prime back in ’11, here’s your FICO scores. So, red: bad FICO score. Gray: good FICO score. If you subscribed in ’12, yeah it got a little less good. Your bars…let’s call it the same. And then in ‘13 and ‘14 and ’15. So, all of a sudden, our FICO scores are getting bad, worse, in the upcoming data (we have this data as of three, four weeks ago – we’re still going through it). These are very expensive and awesome surveys. It’s probably headed up there again. So, the point is, why do you see Besos out there doing, I don’t know, Champion by the sea, Manchester by the sea, whatever the heck that really depressing movie was. Why is he doing red carpet movies? Why’s he doing NFL streaming on Thursday nights? Why is he doing Cloud and music and all this? He’s putting more in the box; he’s trying to make you say, “Okay I subscribed to Spotify and then this and that…do I need ten models? No, I might just need two, I might need Prime. I might need Costco. There’s going to be a couple out there that we need. You can’t not need this. Especially if your sub-prime and Amazon has the best credit card on the market. So, this is a really key trend here and this is exactly why, if I was any retailer out there that’s anything other than an exceptional brand with a great experience, I’ll say that experience thing over and over again and I hope I’m asked about it, which means Keith please ask me about it if no one does. It means that you’re in really deep trouble.
Will Amazon be in trouble if they don’t acquire something that sub-prime people love and are not talking about? Not all subprime people are on opioids, but a lot of subprime people are on opioids, which I’m sure there is a correlation.
So, I’m going to hit on a quick minute here, which is planned because I already have a heading, and I’m going next and, as our experts here in the studio told me to do, I’m going here I’m going to hit my little pen button. Okay, this is why Amazon I think will we buy Best Buy. Because it has to. Actually, the question is, will a buy Best Buy or will it kind of own it without buying it and it’ll be its best off balance? So, if I’m looking at a Best Buy store now – Whole Foods operates in the top 300 MSAs. Best Buy operates in the top 600 – it’s got to branch out. Here’s a Best Buy store right now. This is a 60,000 square foot box. A really, really big store. If I’m Best Buy, here’s my 7,000 square feet of inventory space where I carry a lot of stuff that no one really wants to take home. Here’s my Apple stores right over here. Here’s my Magnolia area, which is actually really good – it’s their high-end sound. it’s awesome. Here’s where you sell a Dyson vacuum. Here’s where you can buy a pot and pan. Here’s where I buy Skullcandy earphones and video games.
This is not a good model. Why does it comp down? If I were buying this, if I were a private equity firm, if I were anyone who wants to go activist on it, and totally knock yourself out on this, this is what I would do. And if I was Besos, and I was as good as his strat planner is, I’d be thinking this: here’s a new box; it’s a 60,000 square foot box. Still, it doesn’t change – rents are going down because rents are going down everywhere because nobody wants real estate. You draw a line down the middle. I mean, a wall – a wall costs $800,000. Not an expensive wall. So here you have inventory space – 30,000 of stuff like Sono speakers and stuff that we actually want -that we actually want to buy. So, this is all of our inventory space here. Now, you have something… you still have the Apple Store back here and that’s great. But I’m going to do something here – why not do a deal with IMAX? You have something awesome; you drive in a new consumer; you do a deal with like Lowe’s or whomever it might be if for like a great film experience. Why don’t you do laser tag? I don’t care what the hell you do but get something there to draw consumer in and actually get them jazzed up to buy something that’s stored over here.
And then there is the kicker: it owns Geek Squad. This is me trying to draw a car – I could just draw a swoosh and it looks like a damn sneaker – but now it owns Geek Squad. It already owns that final mile. So, if they want to go to your house – boom 600 SMAs out there. DMAs, whatever you want to call them. They’re there. So, if you’re Amazon, you want this. You own that final mile. Where did they just screw up in this whole fresh business? Because they’re relying on the post office. You don’t want to rely on the post office in order to get your pampers or your spam on time, or your ground turkey. This is exactly why it has to do – something like this. It could be Dick’s Sporting Goods, it could be a sporting goods experience. It could be – you could put in a big koi pond or a bass pond, it could be a running track. I don’t know what. It could be something.
It could be anything any good, really anything. You know it’s amazing, it’s the darndest thing, you haven’t said that people would be buying everything with bitcoins. I could have sworn that that’s what everyone was telling me on Twitter today. The whole world is going to be Bitcoin.
Amazon will probably do a cryptocurrency.
Yeah, that’s kind of been rumored. Isn’t that fascinating. That’s another Bitcoin headline. Just before get to the very thorough, by the way, we have a very thorough Q&A here Brian, so I want to get to that. A lot of the questions, just to take some right off the top – I’ll do the top down on macro. In terms of Brian’s world, if you look at where retail sales are (Josefina, hopefully you can pop that up there on the board), in terms of the most recent data. But of course, the US economy has been accelerating this year and this damn data will get you every time. You can see on the far-right side under October, you have retail sales accelerated, or have been accelerating, but they’re up 4.6 percent year-over-year. That’s a big number in conjunction of a headline GDP number of 3.3 percent. Of course, what you’ll note is that underneath the hood, X Auto for example, people say there’s a lot of auto sales because of the hurricane – true. If you back out the auto, it’s still up 4.3 percent year-over-year. To put that in context with someplace that doesn’t have the US consumer, because it’s not, drumroll, the US. Like France, for example, has consumer spending down 0.6%. Or Italy, down something percent. You know, the US consumer is very strong and when people talk about retail and its strength, they often miss that the aggregate numbers have been that strong. So that’s something that we want to belong of; that’s the consumer discretionary stocks. We don’t want to belong of your grandpappy’s stuff. We don’t like certain things. You know, Brian’s been one of the most ardent bearers on something like Kohl’s or some of these other department stores that have completely imploded and then bounced. But the point was that he was bearish on coals before it blew up. Again, there’s so many different things to talk about here. But again, just want to make the simple point that from a top-down perspective, we do like his sector. We do like the US economy and again, those are the pretty straight-up reasons why food, drink, clothing, whatever you’re buying these days tend to look pretty good.
Josephine, I don’t know if you have one other chart that I want to show here, I think you’re showing construction. Yeah, look at this one. look at this. This is warehouse construction Brian. Warehouse construction put in value. Look at the chart of warehouse construction. That looks like a Bitcoin chart. Yeah, do you want to know why? You already know but I’ll give you my vantage point.
Alright, so in 1996, we had nine billion square feet of store space. It could be a Foot Locker on the corner, it could be a big regional mall, it could be a strip center.
1996. Why do you start with 1996?
Because that’s when we had nine billion square feet. It was an industry paradigm shift.
That’s when you started being an analyst.
1993. So, we’re going to start in ’96. At that same point in time, we had nine billion dollars, I’m sorry, nine billion square feet of that chart that you just showed. So, we were on parity; we had the same number of square footage. Same amount of square footage with stores as we did with our DC’s. Now, we have 13.2 billion square feet of space out there where we buy stuff. We still have nine billion square feet of DC’s. So, we haven’t grown our DC count over time, store counts have grown over time. You have the Kohl’s of the world, who’s probably the worst retailer I’ve seen in a very long time. You’re saying, “Yeah we just have to use our stores as a DC”. That’s like me saying, “Yeah I just have to grow a foot in order to slam dunk”. These things just won’t happen. So that chart there is really, really interesting.
I like that. You and I have a lot of things in common, but I can’t slam down.
You have a slap shot, though.
In other news, non-fake news, let’s go to the questions. First question here, let’s see here. Do you have an opinion on Duluth clothing company? Actually, this one, I don’t think you do, at least if you do, you’ve been hiding it from me.
No, it’s a relatively, it’s one of those names where you kind of look at it like, wow, why is this going public? And it did about a year ago, and it just blew up earlier today. And you know, you get lipstick on the pig. Alright, a year later, you have a bad IPO and that just blows up. It’s my bad, it should have been on my calendar but it’s not experiential and it’s not brave. There’s no brand strength.
I got an opinion on that, that looks like hell. That’s what that chart looks like. Just FYI.
Brian, given the upcoming tax reform that looks to raise taxes on much of the middle class. I might have to stop – I just hate it when people talk about putting people in classes, it makes me sick. It’s just disgusting. Are you part of a class? Did your mom and dad say you’re low class? I’m of the middle class… Anyway, I think you meant middle income. Given the upcoming tax reform, look and by the way, that’s the Communist Manifesto if you didn’t know. They were trying to pick classes of people against people. That’s just wrong. Anyway, I knew you knew that.
Given the upcoming tax reform Brian, to raise taxes on much of middle-income people, people can be of middle income. How do you think that impacts retail, particularly on the high end?
So, I would tell you this. And look, this is pure opinion. Our firm is doing a whole lot of work on this right now. The street is doing a lot of work on it. Where I’m going, the incremental thought I’m thinking is this: if we have the ding in the mortgage – this whole mortgage, you know, tax hit – probably benefits if you rent. Probably doesn’t help you a whole lot if you’re in the top 20% and you own a million-dollar home. On the flip side of that, if you get your benefit and you’re shopping at a dollar store – if you’re going to Dollar General – we put up a monster comp earlier today, you could almost make an argument and I’m not making it yet, because we’re still doing a lot of work with our teams, that you actually do start to see a little bit of a flip from the high end down low end. And I look at a brand like Tiffany. We’re in the best macro-environment that we’ve had in how long – it is this whole cycle. Over the past three quarters, it’s been comping like one… you’ve had brands like Montclair and Prada, Gucci, who were just killing it. And you’ve got a Tiffany who’s there and it is such a slow erosion that they don’t know they got a brand problem. This thing is Ralph Lauren three to four years ago. You have activists on it, great. I’m not going to stay away just because I think I’ve got an activist who’s got a better research process and we do. This is one I love short side.
And by the way, it’s a free webinar, I’m going to give you some free opinions here. Just like Brian will. Again, if you have an opinion on politics, you better be very careful okay? Your opinions on politics do not find their way into the truth zone that is modeling companies and again modeling the economy. If you haven’t learnt that this year, that’s because you haven’t paid for a product. Again, if you get everything else for free that has been scaring the hell out of you politically, you haven’t been capitalizing on this market move. So, again, check your politics at the door if you want to be part of our crowd. that’s how we do it. I’m not a Republican or a Democrat. I’m a green card holder in the United States of America and I don’t believe that people are part of classes.
Next question: can you talk about the implications Brian, of the excess capacity in strip malls?
Yeah, so, in 1996… Back in 1996 we had 1100 of these really nice malls like your West Chester malls. I grew up in Staten Island, New York. It was an 800,000 square foot mall; home of the world’s largest garbage dump. You got to love it. Took me a long time in order to lose that accent. Now that mall is 1.8 million square feet. So, we had 1,100 malls that have grown in size, but we had 1100 malls. Now, we have 1,100 malls. I’m not saying we need 1100. I’m simply saying that it’s kind of waterfront property. So as far as everyone who thinks every read is dead – every read is not dead. You got to look at the portfolio. Strip malls – this is where I got calls and Best Buy and Bed Bath & Beyond, which we didn’t talk about, which is a mess – we went from having 600 of them in ‘96 to 6600 of them right now. “Will Amazon buy Kohl’s?”. no, Amazon won’t buy Kohl’s, that’s completely ridiculous. It’s actually doing a deal with Kohl’s now that’s costing Kohl’s money. So, we have way too many strip malls and that is a fact. I will go to the mat with anybody on that.
The markets kind of told you that. I mean, look at “Blood Bath and Beyond” stock. I mean, that’s just been a god-awful place to have your money. It’s even worse than having a political opinion on the market, which is pretty bad. So again, thanks for that. Let’s get some more. There’s a lot of questions man, you’re a popular guy. Let’s see here.
Lulu Lemon is having a good day – is that one of the stocks you still like Brian?
I like it but no I love it. I think it is going higher. So, the great thing about this one, aside from A – it’s a relevant brand, B – it has a direct model and no wholesale model. I beat them up for five years. “Guys, you need a wholesale model. You got to sell to Sports Authority in Macy’s”. Well guess what? Sports stores – done. And now Macy’s closing stores. So, they got it. The product is really good. Men’s is getting better. Their Internet is getting better. I was going to say pod 1, but sales were accelerating, margins are getting better and its capital structure is getting better. Everything about it, just check, check, check. And it’s what Keith’s about a buck away from a 12-year high.
It looks great. I know you said love is not a word that we should have for stocks, but I love it when my wife wears them. There’s a fantastic look to that. But at the end of the day, the stock to me on my metrics, and again this is how we make the sausage here, is I work on the quantitative side of what the equity is doing. I don’t care what the company does, no offense to Lululemon or to dogs. To Brian, by the way, we had to go through that this morning by the way. I said that I’m not a huge lover of dogs, I like dogs but other people, you know, get upset when you say you don’t like something that other people own. So that’s called the endowment effect. You have an actual or central tendency to over weight or over value what it is that you own. So that’s the problem with investing in retail sometimes, is that you naturally have a lot of qualitative opinions on what it is that you wear, that you own. And again, things that you have invested interested in, for example. But what I’ll do with that is I’ll give Brian the quantitative research look on something like Lululemon. It actually just broke out most recently, not today, but most recently on what we call an intermediate term trend perspective. So that stock looks great. It’s overbought today, but on all pull backs, provided that Brian doesn’t say anything negative to me about it, I’d continue to buy Lululemon.
Are you saying dog as in, like a golden retriever or like a pug crossed with a dachshund? I mean, here we go, because Brian loves dogs. And I apologize to my mom and my dad because they’re their golden retriever, actually it’s not funny, they’re very upset about it that it died. And that’s all I have to say.
Moving along, Brian, what do you think of the tighty-whitey?
I will do everybody a service. Walk around your office right now. Ask every guy two questions. One: what kind of underwear you’re wearing. three questions. Two: how much did you pay for it? And three: how many pairs of underwear are in your drawer? The replacement cycle for underwear is seven years. That is borderline creepy. It is entirely gross. It’s because we don’t buy like a pair of Tommy John’s and we throw them in our drawer, and then we take that ones from college or we don’t take them and throw them out. So, the point is…
Until you get married, then she just chuck’s them all out.
Hane’s brand is a name – I will use an emotion now – I hate it. I think I’ve been doing this for what, 24 years. This will be the best short of my career. This is a name where it’s got terminal value. It’s great; it’s like an average brand. It’s fine, but it’s stuck in the middle. It’s like, you want to get in the left lane or right lane. If not, stay there and get hit by a truck. And it’s going to get hit by a really big truck and get really hurt. It’s got terminal value. Zero equity value left. We were shorted at twenty-nine, it’s now at what, 2021?
An awful-looking fit.
I think it’s a better short now, it’s in our top ten; our firm’s top ten, then it was at twenty-nine.
It looks like you know Hershey swirls. This thing is ugly. At the end of the day, Lululemon we like. HBI, which is Hane’s brands aka the tighty-whitey. And again, thank you very much to our, I guess you call them home-gamers, that knew that Brian didn’t like that stock. How much market cheer do they have by the way?
Well, they had 37, now they have 29. And it’s going in 18.20.
Just awful stuff.
So, check this out. Go online. Go on Amazon right now and type in “male underwear”. I’m willing to bet you’re going to get about 300,000 hits. If you go to Walmart and you go to male underwear, like if you go into a Walmart store, you’re going to get four. So, all of a sudden, here’s a brand that sells the same product at every channel. Everywhere from jet.com, Target, Walmart, the dollar store, Macy’s. Same exact product but at different prices. Now, all of a sudden, it goes up against Amazon and this is an Amazon-ism, right? You get several hundred thousand pairs of – if we wanted to start an underwear company, which we don’t, we could do it. Like that. There are 25,000 apparel manufacturing plants out there, there are thirty who make sneakers. So, it just shows you the bifurcation between how easy or difficult it is to start a new brand, as far as barriers of entry. This is basics – cotton.
I own part of a company that just started an underwear line. It’s called Sauce Hockey. My underwear, if you want to see right now… First of all, they’re not seven years old, you’ll be happy to know. My underwear’s not seven years old and it says “sauce” right around the band. Now is that hardcore? Did I sell you some Sauce underwear? Sauce Hockey, yeah.
Okay, but at the end of the day, you actually can do that. And the quality of Sauce Hockey, never mind Tommy John or any of these other things that you’re looking at these days, is dramatically different. I mean, I used to be a retail analyst. I do have an opinion on this, but I wouldn’t have to be to know that if you buy a six-pack of Hanes brands undershirts and you put them in the drawer, or you put them in the dryer and then the drawer, you’re going to notice that they keep changing sizes. By the end of the week, you can give your Hanes brands men’s large shirt to your ten-year-old son. So, at the end of the day, they’re some terrible quality, terrible. I’m not happy with that brand. I’d like it if you short that. that’s the I would appreciate that.
Brian, what are your thoughts on Apple retail and where will they go from here? Oh, look at that – is that Sauce Hockey? Is that an advertisement? I am wearing the black ones today. Now that we violated literally most HR things, Brian you’ve basically told… The old wall, by the way, watches this when it’s for free. It’s a super secret. They love to hate. For ten years we’ve been building this firm – they love to hate us and we love you back. But at the end of the day, if you tell somebody at UBS or any old wall shop, I mean Deutsche Bank, wherever, if you go up to the guy and ask him what kind of underwear he’s wearing, you can get fired. Can you imagine that? That’s not good but you told them to do that. So, Apple retail.
I’ll put this in your court as far as Apple. All I’ll say is this: there’s Apple devices. There are people who want Apple. Where the hell are they buying? So, you can go into Best Buy and you can buy them now. You can actually buy them on Amazon. You can buy them in an Apple store. You can buy them anywhere. So, the key point is, you have Apple stores who are doing about eight thousand bucks a foot inside a mall, which is pretty good in the grand scheme of things. Abercrombie & Fitch does, like, 125. So that’s point one. Point two: in these malls, in these big regional malls where you had 1,100 and now you still have 1,100, you had Apple that was paid to operate inside those first 300 malls. Actually paid to just be there in order to generate traffic. So, I would actually argue as more and more malls or going Punk, that Apple will probably get much better economics in order to put more and bigger stores in, instead of your A malls into your B malls, which I don’t know if it makes everyone buy more Apple stuff. But you probably see more Apple stores.
That is interesting. Now we do have a highly engaged freemium audience. Brian, another Brian, just said that he searched men’s underwear, male underwear, came up with the first one through 48 shows 167,000 results. That’s a lot of underwear. That’s a lot of stuff. A lot of issues.
I got to hire him.
Well yeah, that’s the thing.
Can Ross stores (ROST) and TJ Maxx continue to win? I guess that depends if you thought they’ve been winning.
All right, so I am going to push a line on this one as far as us really handing out our premium content and I’m going to give one anecdote. There’s this thing called an Amazon echo now. So, if you go on Amazon, you can say, “Amazon echo look”. It’ll say, okay, we might or might not give you the privilege of buying it. It’s a little camera; it’s about the same size of this cup and it still sound creepy at first. You go on, you put on an outfit and it’ll take an image of you. And just hang on. And it’ll go to all the Instagram and Pinterest and all that crap. But then it’ll say, “Okay you like this outfit, so now you might like that outfit”. That’s kind of bull. It’s not – that just won’t work. Amazon went out and bought or got a patent, it has a patent, as of about nine months ago for on-spec apparel manufacturing. This blue suit or this blue shirt with blue buttons here. If I want orange buttons I’d say boom I want orange buttons on this and boom I got it like that. Six weeks ago, Amazon goes out and buys a 3d imaging company. So now you have a 60-year paradigm of being a 36 short or long or 48 large, I don’t know who the hell you are, or a size 2 4 6 8 10. Now you’ll be a size Heather; you’ll be a size Mary. They will make clothes specifically to your size. So, this is a paradigm change that I would argue most CEOs don’t have in their strat plan. If you’ve got that coming down the pike and you want to go to a TJ Maxx and find bargains on an Armani suit, that’s in size Heather or sizes like Johnny Joe, good luck with that. And all of those stores are based in those 6600 strip malls which are under really big pressure right now. So, my answer is I don’t like them.
Well that’s pretty clear. Crystal.
All right, this is a good question: Brian, I like you on the wipe-y board. can you do more? I don’t know what you want to do though, like I do you have something that actually – I know you. What is your favorite thing to do with clients? Do you always get up and – what’s your go-to move?
I’m going to push, I’ll push thumb up a little more and I was just handed this pen. I don’t need this pen.
So, Kohl’s… I can use any finger right? I don’t have to use this finger. So, Kohl’s, I’m going to use a different finger. The street thinks that’s going to earn 3.68 in perpetuity. It’s got a 1.70 in credit income. It’s got a 1.25 in extra income from subprime customers that drove credit income. And then it’s got two dollars in egregious lease terms that it can never get out of ever, ever, ever. Add up all these: it’s like a five-dollar number. Kohl’s is actually losing a $1.40 and yet it’s “cheap” on cash flow. Kohl’s has no terminal value. Oh no, this is this is what you forgot. The old wall says it’s cheap because that’s the number. Right. Well isn’t that the damndest thing.
Because they’re not looking at this.
I think this would be called, and hold on here, I think this might be called “fake news”. Old wall.
You have a CFO here who left six months ago. \you have a CEO who left a month ago. And maybe they knew this maybe, they don’t. I would actually argue the CEO does not know those numbers and that’s not like a tongue-in-cheek. That’s just weird. That’s not a tongue-in-cheek type thing. It’s, like, they actually don’t know. If you ask him in a “super duper hedge fund one-on-one meeting” and ask those questions, which most people don’t ask him because they don’t know to ask him, he’s not going to answer.
I just got to tell ya, if you didn’t know, because we don’t do free all the time, in fact it’s infrequent. But you get what you pay for. When you watch free TV, you’ll believe the people on TV that are sitting there saying, “well I’m going to buy a cold stock because it trades at 14 times a three dollar and 68 number…” And you know what the anchors going to do? Just look at him like a white wall. Just nothing going on. They would have no idea that that person has no idea what the real number is, and Brian McGough just gave it to you. So, thank you.
The future of TV is bright. The future. I like it. Okay, here’s one that says Santa Claus is going to bring Keith a dog for Christmas. Thank you, appreciate that. What else do we got?
Okay, Brian, what’s your latest view on the RH?
So latest view on RH. All right.
Yeah, I got it. This was the best call I’ve had and it was the worst call I’ve had. We’re fully transparent here right? So, I got it at 28 bucks, I rode it at $205 and then I rode it back to $27. Then then I rode back to $203. So, on that way down, I missed your style factors. That was my issue. Missed execution and numbers came down at the time, when style factors didn’t matter. Here’s the key point now: there’s past and then there’s forward. Past is when you had a great story until they tried doing way too many things and they screwed up; style factors killed it. And then you had the CEO who bought back half of the float in six weeks. Call him what you want, but he bought back half the float at six weeks at a price of thirty, forty dollars. Now socks out $103. This is probably the best non-Dutch auction I’ve ever seen. But the key point though, is…
So, the share counts down like over 40% year over year?
Right, so it’s earning what it earned a year or two go with operating profit that’s half of where it was a year or two ago. So the call here is, can this actually be a decent name again? I think it’s yes and we have a black book out next week. This is a product where, I’m sorry you do have to pay for it because we’re business and we charge, where we go through the full deep dive as to the entire story and that’s what we’ll do.
All right. We need to wrap it up here and we’ll wrap it up here in a second. Killer job guys, thank you me and Brian. Well, we sell on Amazon a lot and their FBA fees keep going up. I don’t know what those are Brian does. So, the FBA fees keep going up. Does Brian see them losing the hold on Amazon sellers and Walmart trying something similar?
It’s a fee.
I know, maybe it’s a slotting fee. As we know.
Yeah, because he sells on Amazon.
Yeah, okay. So, the point is, if you’re going in there; If you’re an average brand; if you’re that underwear brand. Over the 168,000 underwear. So there’s this deal now with Nike and Amazon. Nike is going in to Amazon; it’s going out of Footlocker. So. Why are they doing that? The terms on the pricing with Amazon and Nike is exactly the same as it is with Footlocker. Why would Nike do that? Why would Amazon do it? This is a better deal for Amazon than Nike. Why? Because you have Alibaba. 12.4 billion transactions every year. You have 2.5 billion over at Amazon. When is the last time you saw a redesign interface at Amazon? I don’t know, nine years ago? So now you have a redesign UI and you have a Nike beautiful blah blah blah, whatever type page. And if your brand wants to get in the flow and if it wants to do business with Amazon, then you go to Amazon.nike.com. That’s your new model. So, whatever the fees are this guy’s being charged, they’re probably going up, if he and it is a de facto slotting fee, where he’ll get better placement if he’s under invested in E-com like almost everyone has over the past five or ten years.
All right, last question. This thing’s been an interesting stock. Any upside left in JCPenney?
No. Well look, hey, it’s a three-dollar stock. Bone or bust. I would say this: it operates in those 1100 malls, mostly. Its like the anchor tenant, cashflow positive, terrible store. The point I keep getting is, it has asset value; it owns stores and it does. It owns a couple of really good ones. guess what? You had Ron Johnson, who almost bankrupted this thing and I would argue that he did bankrupt it, just he did it five years earlier and we see it now. He needed a 1.8-billion-dollar check. He went over to Goldman and said, “I need money”, and they gave him money and they securitized all of his good stores. So as far as the asset value play, Goldman probably wants JCPenney to go away.
And by the way, for those of you who didn’t see him back then because that was probably the last time he was on that godforsaken Channel, Brian went head to head on JCPenney when Bill Ackman thought it was the greatest thing since the mall was invented, I think. And, of course, that was dead wrong.
Ackman was dead wrong and you were dead right. And the stock went from what, thirty-eight to zero almost? It’s recently bounced, but you’ll note that every single time it bounces, Brian, it makes a lower high and then gets swamped again. This has just got to be one of the most painful situations to have stayed along wrong.
I mean, if you can borrow, it’s probably a year or two before it closes. Kohl’s is probably a better play, realistically. You want to know, here’s a quick – so after the short interest for JCPenney went up to 52%, stock lost 80% of its value. And Kohl’s is over shorted at 18%. And I know we have our own risk management levels, I’ll just throw that out there.
You don’t like Kohl’s, that’s very clear and most, if not all, of Brian’s views have been crystal clear. So, thank you for being the first guy on the board. We’re happy about that. We’re happy that you took the time out of your very busy day to join us and we’ll hopefully see you again.